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May 4, 2016, 9:31 P.M. ET

2 Cheap Oil Companies

By Shuli Ren

Oil prices have rallied impressively this year from just $27 a barrel to $45 a barrel over the last 2 months. Brent crude rebounded 1% this morning despite news that OPEC has given up on its oil freeze plan.

OPEC or not, supply and demand in the oil market are going to balance in the second half of 2016, according to Bernstein Research, which sees spot oil ending the year at $60 a barrel.

With raw commodity prices rising, the question is whether oil majors’ stocks have already priced in the crude oil rally or is there more room to run? Many stocks are already discounting an oil price of $60 a barrel.

Bernstein thinks so.

First of all, when valuing oil companies, it is not the spot price but the futures price that should count. Although based on Bernstein’s research the spot price can only recover to $60 a barrel by this year-end, , in this market oil needs to reach $70 to balance in the long-run. Therefore, “assuming that there is 15% upside to long term oil prices, this can still give at least 30% upside to stocks from current levels.”

Second, Asia’s oil majors are better priced than those in the U.S., so look at Asia instead! “Emerging-market equities appear to be discounting a lower price than developed market E&P’s, reflecting a more general emerging-market discount,” wrote Neil Beveridge.

So which Asian oil producers should we look at?

At its current stock level, Japan’s Inpex (1605.Japan) prices in only $59.4 a barrel long-term price. “Inpex’s stock price has dropped 28% year-to-date, compared to an average of 9% gain for the other three companies. While Inpex is weighed on by the appreciation of Japanese Yen, and the cancelation of the Abadi FLNG project, the stock price is currently more heavily discounted relative to its long-term value.” For every 1% increase in spot oil price, Inpex’s stock price can rise by 0.66%. This is because its earnings are sensitive to oil price movements: For every 1% increase in spot oil price, Inpex’s earnings can increase by 2.66%.

If you are an oil bull like Bernstein, you would also like CNOOC (883.Hong Kong/CEO). Among Asia’s oil majors, CNOOC’s stock price is the most sensitive to oil prices. For every 1% increase in the spot oil price, CNOOC’s stock price rises by 0.71%, and its earnings jump by 3.6%. Sinopec, on the other hand, has only 0.36% price sensitivity to crude oil because of its refining business. CNOOC now prices in $57.6 a barrel long-term prices.

Year-to-date, CNOOC has gained 13%, while Inpex has tumbled 27%. The United States Oil Fund (USO) is down 1.8%.

About Asia Stocks to Watch

Barrons.com’s Asia Stocks to Watch blog analyses news and research from this vibrant and diverse continent, challenges conventional wisdom, and discusses investment ideas from Shanghai to Singapore, and from Indonesia to India.

Shuli Ren has written for Dow Jones Newswires on corporate strategies and Asia markets. Before becoming a journalist, Shuli conducted quantitative equity research at Lehman Brothers, and later Barclays Capital. She was also a consultant for Charles River Associates. She holds a CFA and FRM and studied economics at the University of Chicago’s graduate school.